Earnings Transcript for CSSEP - Q4 Fiscal Year 2022

Zaia Lawandow: Thank you, Kevin. Good morning, and thank you all for joining us. We'll begin with opening remarks from our Chairman and CEO, William Rouhana, followed by remarks from our CFO, Jason Meier. After their remarks, we'll open the call for questions. The matters discussed on this call include forward-looking statements including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially and adversely from those described in the forward-looking statements as a result of various factors. This includes the factors set forth in Chicken Soup for the Soul Entertainment's most recent annual report on Form 10-K and in our most recently filed quarterly report on Form 10-Q. The company undertakes no obligation to update any forward-looking statement. Please refer to the earnings release under the News and Events tab in the Investor Relations section of the company's website for a discussion of certain non-GAAP forward-looking measures discussed on this call. And with that, I'll turn the call over to William Rouhana, Chairman and CEO. Bill, please go ahead.

William Rouhana: Thank you, Zaia. and welcome, everyone. And thank you for being flexible as we had to adjust the timing of the call in order to take advantage of the opportunity to raise a bit of capital, as you saw in our filing this morning, and I'll discuss that in greater detail in a moment. But first, let me talk about -- a little bit about the past year. 2022 was a year of transformation, not only for our industry but for our company as well. Total annual revenue for the company was $253 million, up 129% over last year, and adjusted EBITDA was $33.5 million, up 53% in the same period. We hit our revenue run rate of $500 million in revenue and $100 million to $150 million of adjusted EBITDA as we planned. When we started the year, we had about 170 employees. Seemingly overnight, we found ourselves with over 1,300 when we acquired Redbox. Integrating a company several times larger than us was no easy feat, particularly one dependent on the returns of theatrical releases. And despite the challenges we faced, we were able to position ourselves successfully for continued growth in 2023. As we look forward, there are many opportunities for us to scale our business further and continue growing, all driven by 3 pillars. One, the Redbox integration and the kiosk rebound that is currently underway; two, our position as a premier advertising sales platform for the broader AVOD industry; and three, efficient working capital that supports the growth we expect in 2023 and beyond. As I'll discuss in a moment, the return of theatrical titles is firmly underway. This return, however, began in earnest months later than we had anticipated when we acquired Redbox. When looking at 2022, there was only a small trickle of big budget wide release hits that broke the year-long theatrical drought, films like Top Gun Maverick, Black Adam and Black Panther

Jason Meier: Thank you, Bill, and good morning, everybody. We ended the year on a strong note with fourth quarter revenue of $113.6 million, up 216% year-over-year and adjusted EBITDA of $14.7 million, up 59% year-over-year. Sequentially, revenue was up 57% from the third quarter. The strong performance in the quarter reflects the continued strength of our multi-platform strategy, including library monetization and digital performance across both our Owned & Operated platforms as well as our Ad Representation business. The performance in the fourth quarter was driven by the strength in distribution and licensing on Screen Media, reflecting the demand for our premium content library, which more than offset the impact of a limited number of theatrical releases at the kiosks and on TVOD. As Bill discussed earlier, the frequency of those releases was sporadic and inconsistent, unlike what we are expecting for the remainder of 2023. Despite the limited number of title releases in the fourth quarter, TVOD revenues were up year-over-year, driven by an increase in orders reflecting the strength of Top Gun Maverick, which was a top order new release title from October through December, demonstrating an impressive consistency unusual for a title prior to its release on the SVOD window. The other driver titles on TVOD were Black Adam and Black Panther. As the theatrical slate rebounds in 2023, we expect to see continued growth in both TVOD revenues and orders. As Bill mentioned, we're already seeing the positive impact of the return on big theatrical titles to our kiosks in March. Black Panther

Zaia Lawandow: Thanks. Kevin, can we open the line for questions, please?

Operator: [Operator Instructions]. Our first question comes from Thomas Forte with D.A. Davidson.

Thomas Forte: I think I'll ask one question and get back into the queue. So Bill, basically, your results were pretty much as expected. Your outlook for the year was good, as expected, including for the first quarter. But you talked about the capital raise and you talked about that you may talk more about capital raises in general. So can you talk about, I guess, your current capital structure and how investors should think about your capital needs over the next 12 months, especially given the favorable performance both in the fourth quarter, the expectation for the first quarter and full year?

William Rouhana: So yes, it was -- I wanted to give you the context of the entire approach we're taking to addressing capital, working capital, those kinds of things. I mean it's a moment in time for everybody in our industry where people are attacking the questions of costs and the questions of content spend and questions of working capital and questions of capital on the balance sheet as a combined effort. And I think that's the way we need to look at what we're doing. We're not just doing one thing. We're doing many things, all of which are designed to drive cash flow faster and to improve the overall capital of the business. We -- I'll repeat some of the things I said earlier because they're important, we took a look at commitments that have been made. That were made by Redbox, made sure they made sense. We combined tech commitments where we could in order to reduce costs. If we found something we didn't like, we changed it. We deferred bonuses, the way I said earlier. We've also tied them more closely to what will be growing cash flow in the second, third and fourth quarters. We've been licensing content in order to make sure that we tap what I used to call our savings account, and it still is, that very large library we have is a generator of cash for us, in the last few weeks alone $8 million. We've looked at our Ad Rep business and put it -- put our Ad Rep business and our FAST platform and on our O&O networks together and are running them with the contribution margin that's coming from the Ad Rep business and the contribution margin that's coming from the FAST platform to fund the O&O networks, that means less capital is needed for the AVOD business, all right? We didn't mention that for the 2023 year, we're anticipating only about $19 million of net content costs. So if you looked at the $100 million of EBITDA on the low end of the range that we have for the year and subtracted $15 million of interest we have to pay on our notes and our preferreds and $19 million of cash content, and throw $15 million in there for working capital ups and downs, you'd have $50 million of free cash flow this year on the low end of our range. So it's a combined effort of things. The public offering we did yesterday is the beginning of just beefing up the balance sheet. As you know, we've been working for a while and getting our working capital loan against our $110 million of accounts receivable, and that's going okay. So it's all of these things together, plus the deferral of the management fees, so that there's more cash flow for the company, that are the right way to be thinking about the business. In these times, things are different. We understand that rates have risen, and we need to compensate for that. We understand that the macro environment is different than it was. But we're not alone in that. Every one of our competitors and every -- and even the big media companies are going through the exact same things as we all kind of rightsize our businesses, our capital structure. So it's not just capital structure, it's also the way we run the business. Those 2 things together are the important thing to bear in mind. And just one more thought, and I know it's a long answer, but it's a very important question, Tom. The business itself, separate from this working capital and capital structure, is really doing well. The AVOD business, that in combination of ad sales, FAST and the O&O businesses, that business is doing incredibly well. There was no slowdown in CPMs and there was no slowdown in fill rates. And that business is continuing to grow dramatically, and we're in a very good spot there. And the kiosks have turned. March was a much better month than February. We're trying to -- I think what we'll try to do is introduce this metric of rentals per day per kiosk so that everyone can do a comparative back to 2019. And if you look at our plan for the year, that $500 million of revenue comes from us achieving 30% of what Redbox did in 2019. With 55 major event movies coming, one every weekend, we're saying all we're going to do is get back to 30% in 2019. If we do that, we get $500 million of revenue and $100 million of adjusted EBITDA. So I think it's the overall plan, Tom, that people need to understand, not just one piece of it.

Operator: Our next question comes from Eric Wold with B. Riley.

Eric Wold: So Bill, I just want to hit on that last comment you made, kind of follow-up, a couple of questions around the rental trends on Redbox. So the getting back to 30% of '19 levels kind of on a full year basis this year, I guess -- one, I guess, what would you expect kind of exit the year on? Kind of what -- can you kind of gave us the run rate for business kind of exiting last year? Kind of what would you expect that run rate to be kind of exiting next year so you can get a sense of the -- or exiting this year to get a sense of trajectory heading into next year? And then two, on apples-to-apples basis, what is kind of the pricing and the average transaction value you're seeing now versus '19? I know you see the price increase late last year when Top Gun Maverick came out, so what do you think about that? And kind of how sensitive are consumers right now to price increases since that, how much could you take it further if you needed to?

William Rouhana: I didn't hear the last thing that you said, Eric, could you just repeat that?

Eric Wold: How sensitive are customers right now, do you think? So if you needed to take price or want to take price further, what is your ability to do so?

William Rouhana: Yes. I think it's hard to tell. We didn't see any noticeable change from the price rise that we did. But it was really -- it was $0.25. So even though it was 11%, it didn't seem to have much of an impact. I think we'll have a way better sense of that as we go into this next few weeks and months, and we have this really steady flow of great stuff. If somehow it doesn't materialize. I have to say, I think it's going to be above what we have planned. But if it doesn't, then maybe one of the factors could have been the price rise for all I know. I don't think we'll do another price increase for a bit, maybe next year sometime. But it depends -- I think it depends overall, Eric, on inflation in general. If inflation drops and sort of calms down, as I know all of us are hoping for on a macro level, then it's less likely. But if it continues at a fast pace, then we should keep up. We really should keep our share where it is. The question you asked about leaving the year, so we've modeled, as I said, the business, so that it will achieve 30% of 2019 by the end of the year. What we would think would happen in 2024 would be we'd rise to 50%. And so -- and that's where we think the business will end up being, around 50% of that level. At the 50% level, the EBITDA from the kiosks alone will approach $150 million a year, plus the EBITDA that we're generating across the rest of the company, which, as you know, has been considerable. So we never think -- we've never thought the business would go all the way back to where it was in 2019. But what's interesting to me is when I look at the same-store sales numbers, as I said in my part of the talk, there -- these same-store sales numbers are already starting to approach 40% of -- and more of 2019. And so maybe we didn't -- maybe we understated it a bit. It's hard to tell. When you -- If you went into a Redbox kiosk over the last 6 months, you would have seen a few movies you recognized, Top Gun, Black Panther, Black Adam, 1 or 2 others, but you would have seen 30 other movies on the home page that you never heard of. And so that's a very different environment for our consumers than when they walk into a Redbox and they see only movies they've heard of. And all these franchise movies that are coming and so many more will all end up on that front page over the next few months. And that should drive, as Jason said in his talk, a rebound in conversion rate from the 20s to the 45% level that it was in the past. And it should drive an increase in the basket plans. We've seen a couple of upticks in basket size over the last few weeks as particular releases have come out. But it's not yet consistently moving towards this 2.5x. It's somewhere between where it was and the 2.5x that it used to be. But if you did the math, and you go from 20% conversion rate to 45% conversion rate, and you go from 1.5 this basket to 2.5, what you would realize is the business should more than triple from where it is today, 3.3x is actually the number, without any new customers coming back. Yet we've only modeled it to double from where it is today. So in looking at the 2023 plan, there are a lot of reasons to believe we could even do better than that. I hope that helps, Eric. But I know I threw a lot of things out there, but I think they're all important statistics.

Operator: Our next question comes from Dan Kurnos with The Benchmark Company.

Daniel Kurnos: Bill, maybe just start on the AVOD bad side. We've heard some commentary around potential greenshoots in Open Web programmatic. I think there's been sort of an uneven recovery. Q1 still is great for or OTT in general, but it sounds like things are still getting better, although everybody is kind of holding their breath for the back half of the year. I know you gave some good color around CPMs and fill rates. But just now that you've kind of -- you fixed some of the distribution and app issues, we know what's kind of embedded in the guidance, but just any color you can give just on the marketplace what you're seeing sort of in March and then heading into summer on that front would be a helpful start.

William Rouhana: Okay. Yes. So I do know that everybody is worried. But everybody -- about the advertising environment. But I would point out that everybody is worried about the banks, everybody is worried about inflation, everybody seems to be worried about everything right now. I don't see a lot of signs in the ad market of the kind of slowdown in connected television that may be occurring in broadcast and cable. There's been really -- January is a little bit weak, but it's always a little bit weak. It's the worst month of the year generally, February was better. March was better yet, and we're back to exceeding year-over-year numbers. But I think from our perspective, Dan, it's a slightly different analysis that I do, which is with the growing footprint that we have, the increase in FAST channels, really great success of the Chicken Soup for the Soul AVOD, which will now be amplified meaningfully by its arrival on Roku finally, the -- that amplification of growth in the O&O networks, in the -- and then going from 2 to 20 ad rep partners, I'm going to have a hard time changing them to third-party clients in my vocabulary, but that's what the guys want me to do. That -- the combination of that growth, the growth of FAST, the growth of third-party clients and the growth of the O&O businesses are really driving our increases more than the share of the marketplace that we're getting. Although I did see a study yesterday that showed we were clearly #5, as we've always thought, in market share, but -- and not too far behind FreeWheel actually, pretty close. So I think we'll keep growing this year just because we keep expanding the footprint, because we have more territory, because we have more assets. So I'm a little less worried about what that means for the year's numbers. If it's a stronger advertising environment, it will probably do better. But I think what we're doing in the overall way we're running the business is the reason we're growing. It's not just the market itself that's growing with us, we're also taking market share and approaching the business differently than others have. I have to say the -- this Crackle Connex, which is a name for our third-party client business, is really poised to be a very, very profitable cash-generating business for us. And I think the arrival of Netflix and Disney to the industry has helped us because it's forced some of the smaller AVOD to look for a way to sell their direct ads, and none of the other top 5 companies will sell someone else's ads for them. So this gives us a pretty unique position, and it's why we've gone from 2 to 20 in such a short period of time. And there actually are quite a few more of these companies that are in conversations with us about joining the club, so to speak. So I hope that answers it, Dan, but it's a slightly different perspective than just about the market.

Daniel Kurnos: Well, no. I mean I wanted to get into that because the dynamics of the market have obviously changed. It looks like SVOD is obviously kind of peaked and/or slowing. AVOD is still growing. Over the air is growing faster yet than that. But the conversation around FAST and rights management has obviously accelerated as well to the point where FAST rights and especially international, and I saw you guys do something with KC, right? I mean you've kind of built sort of an amalgamation of rights that you have rights that you don't. I don't know where you fit on that. But the large companies are now -- from a content perspective, they're scaling back on the number of products, and they're paying more for quality because they all obviously have to rightsize their own balance sheet. They can only release billions of dollars for so long, Bill. So in that regard, I'm curious, you talked about lower content spend, I'd just love to get an update from sort of a rights perspective and incremental distribution opportunity as well as on the content side, it sounds like sort of the base case for libraries, content actually -- content costs are actually coming down on the syndicated or legacy library side. So I'm just kind of curious how that factors into your viewpoint?

William Rouhana: Yes. So as you know, we accumulated library in a variety of ways over the last 5 years, building it up to over 21,000 films and TV shows that we have long-term rights or intellectual property ownership of. And I always said to -- I mean, to you and everyone else, I view this as a savings account. Someday, it will -- we may not continue to buy, but we'll actually license and harvest. And what you're starting to see is signs of that in everything we're doing. So the KC Global deal is a great example of it. Thank you for mentioning it. KC Global is a fantastic company across Asia, and they needed certain rights in order to launch a new channel. They came to us. We were able to enter into an agreement with them. It's probably the first step towards a broader partnership with them. And we're getting revenue we didn't get before. The Keshet deal was an early example of that. By the way, Locomotive, which is a slightly different approach to international, is also generating revenue. And Rana Naidu, which is the show that Locomotive made for Netflix in India, is a big hit, and I expect it's going to be renewed for season 2 shortly. So we're monetizing content in lots of ways, but we've always said that, that was what we wanted to do. Specifically, in the FAST space, this is a really interesting development the way it's evolving. And you are right, the bigger companies are starting to look at their libraries and go, wait a minute, I don't need exclusivity on everything. This is something we've been saying for how many years. We're better off monetizing. We're better off monetizing the content we have in as many ways as possible. And that is what they're starting to do. But that's always been our strategy. If you go back to the way we control cost of revenue on our networks, and our O&O networks have the lowest cost of revenue of any of the big ones, we do it by making sure that we monetize the rights we don't need to use on our own networks. And getting capital -- getting money back against that, which reduces the net cost we have in the content. And when we put it on our networks, it means most of it's going to be profit. So these strategies that you're seeing the bigger companies adopt are really things we've done from the beginning. Now I would say we've done it from the beginning because we're small and scrappy and we needed to, but it's also what we believe was right. So that's what we're seeing. I think we only have time for one really short question, operator. We got to wrap up.

Operator: Our next question comes from Mike Grondahl with Northland Capital.

Michael Grondahl: Bill, it's Mike. Three really short ones. So for fourth quarter, can you break out revenues between Redbox and Chicken Soup legacy? I don't think I saw it. And you guys had, I believe, like a $40 million cost synergy goal with the acquisition, kind of specifically where are you towards that goal? And I'll leave it at those two.

William Rouhana: Okay. Why don't -- we'll break out the numbers for you in our separate one-on-one because I'm already over time. But the quick answer to your question on the synergy are they're achieved. I expect them to be -- expect them ultimately to be higher. And the one that was the most important was pulling back the rights to sell the ads for Redbox AVOD and Redbox FAST, giving that to our own sales force, saving 35%, increasing CPMs and increasing fill rates. The combination of those 3 things is a very important number towards the $41 million we identified. I know it's 9

Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.